Market round-up: 12 – 16 November 2018

The information in this blog or any response to comments should not be regarded as financial advice. If you are unsure of any of the terminology used you should seek financial advice. Remember that the value of investments can go down as well as up, and could be worth less than what was paid in. The information is based on our understanding in November 2018.

They say a week is a long time in politics; if that’s the case, then the last set of five days must have felt like an eternity for a beleaguered Theresa May. With Jo Johnson’s resignation as Transport minister still ringing in her ears from the previous week, the Prime Minister pushed ahead with her Brexit agenda as news broke that a draft agreement was in the offing.

With the news that finally there may be some clarity emerging on a divorce deal, Tuesday saw sterling climb to a six-and-half-month high versus the euro, and with an endgame in sight, the more domestically focused FTSE 250 leapt nearly 1%. However, as many have come to expect with Brexit negotiations, little is simple and, although a tense five-hour meeting at No.10 on Wednesday yielded a backing from the Prime Minister’s cabinet, Thursday saw any hope vanish.

Westminster

The political merry-go-round clicked into full gear during the second half of the week as Dominic Raab, Brexit Secretary and the man put in charge of negotiations with the EU, was first to hand in his notice, citing that he could not “in good conscience support the terms proposed for our deal with the EU.” He was followed out the door by Esther McVey, the Secretary of State for Work and Pensions, soon after. With the Prime Minister’s plans seemingly in tatters, her problems were further compounded by Tory Eurosceptic Jacob Rees-Mogg going on the search for the necessary party signatures to trigger a vote of no confidence in her leadership.

How markets reacted

The turmoil in Westminster soon spread to the City punishing domestically focused sectors such as banks and housebuilders. RBS sunk nearly 10% in choppy trading whilst Persimmon, Barratt Developments and Taylor Wimpey all saw 7% wiped from their share price. Sterling plummeted 1.7% against the USD and 1.9% against the euro. Some respite was felt on Friday however, as Theresa May vowed to stay on as leader, and Environmental Secretary, Michael Gove, also ending speculation that he will be the next to go.

Stock market pain was not just confined to the UK this week as international bourses attempted to arrest five straight days of losses. The main culprit was oil, dragging down major benchmarks during the beginning of the week. As fears of oversupply built, prices fell 7% on Tuesday, not helped by Donald Trump’s tweet pressuring OPEC not to cut supply to prop up prices.

On the economic data front, UK retail sales came in well below consensus forecasts showing that the consumer is still reluctant to spend whilst the Brexit cloud looms overhead. The data acted as more bad news for beleaguered high street retailer Debenhams, who had seen its largest ever stock price decline this week. Drapers, the fashion industry magazine, reported that some suppliers have allegedly stopped working with the retailer. Wednesday saw 21% knocked off Debenhams’ share price followed by a further 9% the following day. According to the magazine, some suppliers had cited cuts to Debenhams credit insurance and fears of missed payments.

Next week sees a raft of economic data released across the globe. However, the ongoing Brexit tussle, which will potentially approach a tipping point, is what will dictate the direction of travel for UK assets in the short-term.

The beginning of the week

The week begins with house price data here in the UK, released via the Rightmove House Price Index. Property, especially in the South East, appears to be one of the assets suffering from Brexit uncertainty with price appreciation slowing. Punitive tax changes have also acted as a headwind, particularly for one and two-bed properties as witnessed by a drop in mortgage approvals, which were down 14% in October compared to a year ago, and 53% compared to three years ago.

Across the Atlantic, the theme of housing data carries on through releases on housing starts and Permit Information. As mortgage rates have been on the rise in the US, the 30-year fixed (most popular term for US borrowers), which recently hit an eight-year high, could act as a drag on the housing market.

The end of the week

Investors get a further insight into the world’s largest economy through data on Durable goods orders, PMI and oil inventories, all reported towards the end of the week. US oil inventories will take on extra importance given the oil price’s free-fall over recent weeks, entering a bear market after falling over 20% from its peak. Increased production from the US and OPEC, coupled with less stringent Iran sanctions, have contributed to the drop in black gold. An increase in US oil inventory data has added to pricing pressure, as we have witnessed eight straight weeks of inventory increases, showing supply is outstripping demand; next week’s numbers will provide fresh data for analysts to pour over.

The week comes to a close with Eurozone Composite Purchasing Managers’ Index (PMI) data, which highlights the strength of the manufacturing and services sectors. With political noise rippling through the Eurozone in 2018, it will be interesting to see whether this is taking its toll on the underlying economy or whether the businesses on the ground are continuing to grow and expand.